Posted on 10/20/2009 8:11:23 AM PDT by blam
Why the Dollar Will Likely Rally in the Next Crash
by: Washington October 20, 2009
As I have previously noted, HSBC currency chief David Bloom doesn't think that the dollar will rally when the stock market next tanks:
The dollar rallied last year because we had a global liquidity crisis, but we think the rules have changed and that it will be very different this time [if there is another market sell-off].
Is he right?
I have argued that the new dollar carry trade could very well unwind during the next crash, which could create an enormous need for dollars.
I've also pointed out that many top economists say that the problem with America's banking system was not really a liquidity crisis, but an insolvency crisis.
Now, Tyler Durden has written a must-read summary of a new report by BIS which shows that the real liquidity crisis last year was among European banks, which were hugely overexposed to the dollar (in amounts many times greater than their GDPs, in some cases), and so they were desperate to raise dollars last year when the market crashed.
I don’t know who to believe anymore??? There are so many conflicting opinions, at this point I am just plain old confused.
Is there any asset class right now that is undervalued, except the dollar?
Are there ANY contrarian plays whatsoever, except the dollar?
Someone help me out if I am missing something obvious.
But it seems to me that every asset class — oil, other commodities, gold, US equities, foreign equities, real estate — are all overvalued. Some, near bubble status.
Except the dollar.
Comments?
Depends on whether the Fed mops up all the liquidity dollars out there at an appropriate time. If not, metals and oil are certainly due to rise in Dollar price.
Yup, me too.
So I guess the massive money printing by the Fed is no cause for concern? They’ve printing/spending money like drunken sailors, no insult to drunken sailors intended. As Milton Friedman said, “Inflation is always a monetary phenomena.” Why do you think oil and the metals are rallying? Now there will be a rally before the next dollar crash, this is almost inevitable. What has been happening in the so-called “carry trade” virtually assures it. Banks like JP and Government Sachs, which are commercial banks can borrow from the Fed for free. They then take those funds and go buy the highest yielding international instruments they can find. Then they sell the dollar short. They “know” that the dollar is sinking, so the funds they receive as interest or dividends get translated into more dollars. Presto, risk free “trading” profits. Wish we could all do that. However, the problem is that the markets are so volatile that when there’s crisis in the markets and the money flows from stocks to bonds, which it always does, there’s going to be a huge demand for dollars which will cause a temporary rally as everyone rushes to cover their shorts. This will be extreme fun to watch. The carry trade will turn negative quickly and so will those shorts.
No one knows when this will happen but they do know it will. And the results won’t be pretty.
Someone just posted an article that cheers the Doe for getting close to 1100. ????? More confusion. Thanks for additional articles.
Who would have predicted this the last time? If it happens again Schiff’s name is mud.
We will not recover, because Obama set the table for failure.....on purpose, I might add.
Ask three economists a question and you'll get four answers.
The underlying value of the dollar is the interest rate it can earn. Many decades ago, when the dollar was redeemable for gold or silver, those precious metals were the underlying value, but since 1971, when the gold window was closed, the value of the dollar can be tied most closely to the interest rate dollar funds can achieve in the market place.
When we see interest rates rising for dollar denominated securities (bonds) then we may be seeing the start of a reversal in the dollars decline in value.
Higher interest rates are needed and ultimately will have to return, but the transition from a weak dollar to a stronger dollar is likely to be very painful, with even higher unemployment then the near historical highs we have now.
The real challenge is to transition the current protected class, which are the “too big to fail” banks and car companies back to the individual saver and investor. Without higher interest rates there is no incentive to save or invest in dollar denominated securities.
The individual’s and family’s savings are being sacrificed on the altar of the bail out of the banks and new government programs like obamacare and cap and trade.
Cheap dollars have made possible the debasement of our economy from that of an ideal where individual wealth is possible, although not guaranteed, by hard work and savings to a socialist economy where the individual is subordinate to the state.
If all the economists in the world were laid out end to end they still wouldn’t reach a conclusion.
Gold is at 1057 confusion over cash is trash with Obama in office.
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